The impact of corporate governance on firm performance: empirical evidence from vietnamese listed companies

In which, the performance of companies is measured by four financial indicators which are ROA, ROE, Tobin’s Q and Z-score by Altman (1968), while the independent variables comprise[r]

VIETNAM NATIONAL UNIVERSITY, HANOI VIETNAM JAPAN UNIVERSITY

TRAN LE THU HA

THE IMPACT OF CORPORATE

GOVERNANCE ON FIRM PERFORMANCE: EMPIRICAL EVIDENCE FROM

VIETNAMESE LISTED COMPANIES

MASTER’S THESIS

Hanoi, 2020

VIETNAM NATIONAL UNIVERSITY, HANOI VIETNAM JAPAN UNIVERSITY

TRAN LE THU HA

THE IMPACT OF CORPORATE

GOVERNANCE ON FIRM PERFORMANCE: EMPIRICAL EVIDENCE FROM

VIETNAMESE LISTED COMPANIES

MAJOR: BUSINESS ADMINISTRATION CODE: 8340101.01

RESEARCH SUPERVISORS: Prof TOHRU INOUE Dr HOANG VIET HA

Hanoi, 2020

ACKNOWLEDGEMENT

I would like to express my sincere gratitude to my supervisors Prof Tohru Inoue and Dr Hoang Viet Ha for their continuous support of my research, for their patience, encouragement, enthusiasm, and immense knowledge Their invaluable guidance has helped me in all the time of researching and writing this thesis

I would like to express my gratefulness to all the lectures in the MBA Program of Vietnam Japan University who have conveyed extremely valuable lessons for me during recent two years I also would like to send great thanks to Ms Huong, the MBA Program Assistant, for her kindly guidance and endless support during my studying period

ABSTRACT

TABLE OF CONTENTS

ACKNOWLEDGEMENT i

ABSTRACT ii

LIST OF ABBREVIATIONS v

LIST OF TABLES vi

LIST OF FIGURES vi

CHAPTER INTRODUCTION 1

1.1 Research Background

1.2 Research Objectives

1.3 Research Scope

1.4 Research Methodology

1.5 Research Structure

CHAPTER LITERATURE REVIEW 7

2.1 Theoretical Framework on Corporate Governance

2.1.1 Definition of Corporate Governance

2.1.2 Theories on Corporate Governance 10

2.2 Firm Performance 17

2.2.1 Definition of Firm Performance 17

2.2.2 Firm Performance’s Dimensions and Indicators 18

2.2.3 Financial Performance Measurements 20

2.3 Empirical Studies on the Relationship between Corporate Governance and Firm Performance 22

2.3.1 Board Characteristics and Firm Performance 23

2.3.2 Executive Board Characteristics and Firm Performance 26

2.3.3 Ownership Structure and Firm Performance 28

2.4 Research Gap 32

CHAPTER RESEARCH METHODOLOGY AND DESIGN 34

3.1 Research Methodology 34

3.2 Research Design 34

3.2.1 Variables 34

3.2.2 Models and Hypotheses 41

3.2.3 Data Collection 45

3.2.4 Data Presentation 45

3.2.5 Methodological Approach 47

CHAPTER FINDINGS AND DISCUSSIONS 51

4.2.1 Selection of Regression Model 52

4.2.2 Regression Diagnostics 54

4.2.3 Results of Regression Models 55

4.3 Discussions of Regression Results 58

CHAPTER CONCLUSIONS AND POLICY IMPLICATIONS 65

5.1 Conclusions 65

5.2 Policy Implication 66

5.3 Limitations 70

5.4 Future Research 70

REFERENCES 72

LIST OF ABBREVIATIONS

ACGS ASEAN Corporate Governance Scorecard

BOD Board of Directors

CEO Chief Executive Officer

CG Corporate Governance

HNX Hanoi Stock Exchange

HSX Hochiminh Stock Exchange

IFC International Finance Corporation

OECD Organisation for Economic Co-operation and Development

ROA Return on Asset

LIST OF TABLES

Table 2.1 Different Approaches to Corporate Governance 16

Table 2.2 Performance Dimensions and Indicators Selected 19

Table 3.1 Summary of All Variables Used in the Dissertation 40

Table 3.3 Descriptive statistics of variables 46

Table 4.1 Correlation Matrix 51

Table 4.2 Results of Hausman Test 52

Table 4.3 Results of LM Test 53

Table 4.4 Results of F-test 53

Table 4.5 Serial Correlation Testing 54

Table 4.6 Heteroskedasticity Testing 55

Table 4.7 Regression Results by Using PCSE Method 56

Table 4.8 Regression Results without Control Variables under PCSE Method 58

Table 4.9 Summary of Expected Signs and Regression Results of Models 59

LIST OF FIGURES Figure 1.1 Average Corporate Governance Scores by Countries (2012 -2017) 2

Figure 2.1 The Corporate Governance System 9

CHAPTER INTRODUCTION

1.1 Research Background

Over recent decades, increasing attention has been given towards the relationship between corporate governance and firm performance, especially after the collapses of many large corporations which were supposed to be derived from corporate governance breakdowns and frauds According to the International Finance Corporation (IFC), corporate governance is defined as “the structures and processes by which companies are directed and controlled” It can be seen as a system that determines the rights and responsibilities of different stakeholder groups within an organization including: managers, board of directors, major shareholders, and minority shareholders The ultimate goal of corporate governance is to manage and minimize the conflicting of interests among different groups of stakeholders In reality, corporate governance is increasingly practiced by firms around the world because of various benefits which it brings A good corporate governance not only enhances business transparency but also helps the company in managing risks and wastages, thereby improving its competitiveness As a result, the firm could attract more investors (both domestic and foreign ones) and lower its costs of capital Strong corporate governance also makes company more resilient to stresses and economic downturns

governance standards of ASEAN listed companies It was firstly launched by the ASEAN Capital Markets Forum in 2011, with support of the Asian Development Bank (ADB) and IFC

(Source: IFC, ASEAN Corporate Governance Scorecard, 2012 – 2017)

That low quality corporate governance is due mostly to the passive attitude of Vietnamese enterprises in building a strong corporate governance mechanism The companies themselves have not been fully aware of the importance of corporate governance for their long-term development They are skeptical about its benefits because these benefits usually take time be realized while the initial spending on it is not small Some firms even cannot distinguish between the concept of corporate governance and business administration Therefore, most of companies in Vietnam not actively engage in the establishment of a good corporate governance Lien and David (2014) claimed that this problem is derived from an institutional environment that overemphasize the role of government in the economy, as well as from a business environment which creates conditions for unprofessional or even unethical practices to take place

Actually, there is little research available on the relationship between corporate governance and firm performance in Vietnam as the concept of corporate governance is relatively new here

For the reasons above, “The Impact of Corporate Governance on Firm Performance: Empirical Evidence from Vietnamese Listed Companies” has been chosen as the topic of this master dissertation The study is aimed at adding to the existing knowledge about the effects of corporate governance practices on financial performance of listed companies in Vietnam The author also hopes that the thesis would help raise the enterprise awareness of the importance of corporate governance, thereby enhancing the quality of corporate governance in Vietnam

1.2 Research Objectives

Based on the researching purposes, the dissertation aims at objectives:

First, summarize prominent theories of corporate governance and firm performance, that establishes an accurate understanding about these terms as well as how to evaluate or measure them

Second, examine the impacts of corporate governance on performance of Vietnamese listed firms

Third, propose appropriate recommendations for listed firms, Vietnamese government and related subjects, based on the research results obtained above

1.3 Research Scope

The subject of this master thesis is the impact of corporate governance on firm performance

Time scope: This thesis focuses on analyzing the annual reports and financial statements of these listed firms from fiscal year 2015 to fiscal year 2019 (5-year term)

1.4 Research Methodology

The research uses regression models to examine the relationship between corporate governance and firm performance In which, the corporate governance is proxied by CEO duality, board size, board independence, chairman ownership, CEO’s ownership, foreign ownership Meanwhile, firm performance would be evaluated through indicators, including: (1) ROA; (2) ROE; (3) Tobin-Q; and (4) Z-score by Altman

The data would be collected from annual reports and financial statements of 100 companies which are listed on Hochiminh Stock Exchange (HSX) and Hanoi Stock Exchange (HNX) for the period from 2015 – 2019 However, due to the differences in the capital structures and operation requirements, financial companies such as banks, insurance institutions and other financial institutions were not included

1.5 Research Structure

This research consists of five chapters as follow:

• Chapter 1: Introduction – This chapter provides a brief introduction about background, objectives, scope, methodology and structure of the research • Chapter 2: Literature Review – This chapter summarizes prominent

theories and previous researches on the relationship between corporate governnance and firm performance

• Chapter 3: Research Methodology and Design – This chapter describes about the methodology used in the research as well as how it is designed • Chapter 4: Findings and Discussions – This chapter summarizes the

CHAPTER LITERATURE REVIEW

2.1 Theoretical Framework on Corporate Governance

2.1.1 Definition of Corporate Governance

In a market economy, as companies become larger and are listed in stock exchanges, the shares of the company will be owned by many shareholders The problems of "agency" will arise According to Berle and Means (1932), when listed companies grow and the company’s shareholders become more diverse, the separation between ownership and control had appeared In these companies, the controlling power had been transferred to the managers with the hope that they will work for the benefits of shareholders However, this separation between ownership and control had also created an opportunity for managers to use wealth of the companies for their own benefits Therefore, how to aligning the conflicts of interests between the shareholders and the managers was a difficult question This problem had existed and developed with joint stock companies during the 1920s

Moreover, managers are urged to focus on stock prices in searching of large profits when the stock prices rise This may increase the entrepreneurial spirit of the managers and bring a little efficiency to the company in short-term However, it may also lead to inappropriate actions of the companies with the employees, the customers, and the environment It even leads to illegal actions such as stock price manipulation or insider trading For example, there were many cases that CEOs colluded with investment banks in order to artificially inflate the stock prices and manipulate the stock market in the late 1990s Therefore, a controlling model, which can replace the shareholder value maximization model, has been searched since then

In that context, countries and organizations around the world started to introduce a series of legal documents and guidelines as sets of standards that govern the conducts and structures of the BOD in monitoring activities These set of rules on corporate governance (CG) are issued worldwide, which can be listed as the UK Cadbury Code (1992), OECD Principles of Corporate Governance (1999, 2004, 2015), US Sarbanes-Oxley Act (2002), Nigeria SEC Codes (2009) Although, these rules are established in vaious regions of the world with specific conditions on business culture and institutional environment, they all agree that there should have a mechanism to align the interests of related parties in the company Nowadays, corporate governance could be defined in diverse manners due to differences in authors’ approaches as well as in jurisdictions of each country For example:

• Under the UK Cadbury Code (1992), corporate governance is mentioned as “the system by which companies are directed and controlled”

• According to Sifuna (2012), corporate governance is described as "a system of law and sound approaches by which corporations are directed and controlled focusing on the internal and external corporate structures with the intention of monitoring the actions of management and directors and thereby, mitigating agency risks which may stem from the misdeeds of corporate officers"

In general, most definitions take the company itself as the center and share the following common points: Corporate governance is a system of relationships among various parties which involve in the direction and control of the company These relationships are defined by structures and processes of the company Sometimes, the conflicts of interests among related parties occur (IFC, 2010) Figure 2.1 illustrate a basic corporate governance system and the relationships among different parties

(Source: IFC, Corporate Governance Manual, 2010)

Figure 2.1 The Corporate Governance System

firms with better corporate governance mechanisms bring the shareholder more benefits than ones with poor corporate governance (Brown and Caylor, 2004; Bhagat and Bolton, 2007) Therefore, along with the strong development of joint stock company model in the world and the collapse of many large corporations in the early 2000s (such as Enron, WorldCom, Lehman Brothers,…), corporate governance has gradually become one of the most important economic fields It has been researched and applied more widely in order to improve the performance of companies, especially the financial performance of listed companies in various stock markets around the world

In Vietnam, a formal legal framework on corporate governance has been mentioned for the first time in the Law on Enterprise 2006 which took effect since 1st July 2006 After that, the term of corporate governance has become more widely recognized with the issuance of Decision No 12/2007/QD-BTC by the Ministry of Finance on 13th March 2007, which regulates corporate governance practices of listed firms in Vietnam Under this Decision, the corporate governance is defined as “a system of rules to ensure that a company is effectively operated and controlled in the interests of shareholders and related persons” Vietnam has also actively participated in many projects and initiatives on enhancing corporate governance quality which have been launched by leading international institutions such as IFC, OECD, World Bank, etc Recently, on 13th August 2019, the first official Corporate Governance Code in Vietnam has been introduced by the State Securities Commission of Vietnam (SSC) This CG Code is considered that goes beyond mere compliance with laws and regulations and encourages firms to move towards international best practices

2.1.2 Theories on Corporate Governance

2.1.2.1 Agency Theory

tend to hire professional managers to run the business instead of running it by themselves Since the 18th century, Adam Smith has mentioned that the separation of these two rights will create a conflict of interests between the owners (also known as the principal) and his agents (who are owners’ agents to run the company – also known as the managers) Although his view has not been formulated as a theory but only stated in the form of judgment, it might be seen as the premise for the formation of the agency theory that Jensen and Meckling (1976) formulated later Adam Smith (1776) wrote in his famous book, The Wealth of Nations, that:

“The directors of such [joint-stock] companies, however, being the managers of other people’s money than their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of

such a company.”1

According to Jensen and Meckling (1976), the shareholders (principals) who are the owners of the firms grant authority to the managers (agents) to run the businesses on a daily basis There is always a conflict of interests between the shareholders and managers since the shareholders care for the value of the company and stock price (which is also their benefits) Meanwhile, the managers only focus on their own benefits such as salaries, bonuses and other allowances Therefore, the managers not always put the owners’ interests first This conflict of interests results in a type of cost called agency cost The agency cost is zero only if it is an owner-manager firm, where the principal is also the agent Jensen and Meckling (1976) also claimed that the agency cost is higher when the managers not own or just own very little shares of the company Therefore, managers’ holdings of shares are considered as a remedy to align the interest between the owners and their agents

Agency theory is built on an assumption of homo economicus, which means that human behavior is individualistic, opportunistic, and self-interest Therefore, agency theory suggests that there should be a mechanism to align the interests between two parties for mutual benefits and further development

Although agency theory is widely used as a theoretical framework for corporate governance researches, it has been challenged by many scholars around the world Hoskisson et al (2000) argued that agency theory does not explain the social and psychological factors in the relationship between owners and managers In reality, the assumption of a homo economicus is not always true Moreover, the mechanism of controlling and ensuring the independence of the board of directors does not always work Under the agency theory, independent members of the board of directors, who have only legal rights, may not have enough knowledge and experience in the field of company operations and rarely have a close social relationship with the executive board In addition, another drawback of the agency theory is that it only considers the interests of two subjects which are shareholders and managers Freeman (1984) argued that the needs of other parties involved (such as employees, customers, suppliers, trade unions, governmental bodies, etc.) also need to be considered

2.1.2.2 Stakeholder Theory

The stakeholder theory was initiated by R Edward Freeman in 1984 with his famous book: Strategic Management: A Stakeholder Approach According to Freeman (1984), a stakeholder is defined as “any group or individual who can affect

or is affected by the achievement of the organization's objectives” The stakeholder

by the firm’s performance They are shareholders, creditors, suppliers, clients and regulatory authorities These parties may involve in the corporate governance process of the firm either directly or indirectly with different levels of participation due to their different objectives (Binh and Giang, 2014)

The stakeholder theory argues that a company should consider the interests of all stakeholder groups rather than shareholders alone as traditional viewpoints asserts It is “not only because of ethical dissatisfaction with the exclusive privileging of shareholder interest, but also on the grounds of economic efficiency” (Ogden and Watson, 1999, p 527) According to Alkhafaji (2003), a firm which follow the stakeholder approach is ethical since it takes interests of all stakeholder groups into consideration when formulating its strategies In addition, Svendsen (1998) claimed that trusting relationships between a company and its stakeholders, which is achieved through following stakeholder strategy, encourages information sharing and lowers costs, hence, it affects firm’s financial performance positively and create significant competitive advantage for the firm

In reality, the interests of different stakeholder groups are very diverse and usually conflicting, the advocates of stakeholder theory should focus on maximizing long-run firm value in order to solve inherent problems of multiple objectives (Jensen, 2001) It means the firm should design a structure that discourages managers and employees from short-term financial behaviors because such short-term profit maximization is inevitably destroy the long-term value Therefore, under stakeholder theory, the corporate governance purpose has shifted from maximizing the benefits of shareholders alone to seeking the long-term value of the firm

(1995) argues that “the goals of directors and management should be maximizing total wealth creation by the firm They key to achieving this is to enhance the voice of and provide ownership-like incentives to those participants in the firm who contribute or control critical, specialized inputs (firm-specific human capital) and to align the interests of these critical stakeholders with the interests of outside, passive shareholders” 2 In addition, Porter (1992) argue that employee stock ownership

encourages them contribute more to the firm, which makes the firm more productive and stronger

2.1.2.3 Stewardship Theory

As mentioned earlier, the agency theory cannot explain the cases that there is no conflict of interests between managers and owners, or when the managers’ behaviors are consistent with the benefits of owners In order to provide guidance on corporate governance in such cases, scholars have proposed the stewardship theory

Stewardship describes the position and duties of a steward who get responsibility and authority from the owners to take care for their property in their best interests The stewardship theory assumes that managers are not influenced by the “self-interested” behavior, but by motivations related to the owners’ goals This theory, which is built on psychological and sociological concepts, considers the managers as a “steward who is motivated by a need to achieve, to gain intrinsic satisfaction through successfully performing inherently challenging work, to exercise responsibility and authority, and thereby to gain recognition from peers and bosses” (Donaldson and Davis, 1991, p 51) There is a huge difference between agency and stewardship viewpoints which is the motivations of managers Since the agency theory assumes that managers are economic man, they are driven by extrinsic motivations that comes from external reward such as money or quantifiable economic gains Meanwhile, under the stewardship theory, managers are motivated

by intrinsic motivations which are difficult to quantify such as a task finished successfully or a feeling of achievement (Binh and Giang, 2014)

The stewardship theory supposes that managers always act in the best interests of shareholders, therefore, instead of placing management under strict control by owners, the firm should empower managers to make autonomous executive decisions (Donaldson and Davis, 1991) Heightening the control and monitoring of management, in reality, may bring results that is contrary to expectations because it reduces managers’ motivations thereby limits their actions for the benefits of the company

Scholars who agree with stewardship theory also mention the managers’ levels of identification with their organization Identification refers to a person’s feeling of close emotional association with an organization High levels of identification encourage the employees work harder and contribute to the organization’s success The stewardship theory asserts that the managers have a high level of identification with their company then they will try their best to attain company’s goals At that time, not only their intrinsic motivations but also the owners’ interests will be accomplished (Davis et al., 1997) Therefore, managers with high degrees of identification should be empowered to use their competence for driving the success of company

better performance of the firm because they have in-depth knowledge about firm business as well as practical experience

Although there are many differences between agency theory and stewardship theory, both of them have a common ultimate goal of corporate governance which is maximizing the interests of shareholders However, they have different perspectives on the ways to attain that goal

Table 2.1 summaries important points of the three above approaches to corporate governance concepts

Table 2.1 Different Approaches to Corporate Governance

Agency Theory Stakeholder Theory Stewardship Theory Key

assumption

The interests of shareholders and managers are conflicted, and

managers work in their own best interests

The firm focus on attaining corporate goals by balancing the interests of different stakeholder groups

The interests of shareholders and managers are aligned, and managers work in the best interests of the company

Theoretical basis

Economics and finance Management Sociology and psychology Corporate governance goal Maximize shareholder value Maximize long-term firm value Maximize shareholder value

Board role Control and monitor Coordinate and cooperate Facilitate and empower Corporate governance practices suggested

- Independent board of directors

- Separate CEO and chairman positions

- Dispersed ownership - Board representation by various

stakeholders - Employee stock ownership plan

- CEO should be also the chairman of board - Small board size - High proportion of executives on board

2.2 Firm Performance

2.2.1 Definition of Firm Performance

Nowadays, firm performance is considered as one of the most important indicators for investors and stakeholders around the world Specifically, investors look at a firm’s performance to evaluate whether it is worth for investing or not Rational investors tend to stay away from companies with poor performance because of its uncertainty in the return on investments and inherent high risks For shareholders who has already invested their money in the company, the firm performance is also their investment performance For managers and employees, in most cases their remunerations somehow would be linked to the performance of the company For debtholders, firm performance would be one of the most important criteria to assess the creditworthiness of the company

Meanwhile, in the field of research, firm performance has also gained enormous attention from various scholars It is usually used as an important dependent variable in many strategic management studies In spite of its popularity in academic sector, there is rarely any consensus about its definition and measurements because of its complexity

In the early 21th century, organizational performance was defined as the capability

of an organization to efficiently exploit its available resources to produce outputs which are not only relevant to the needs of stakeholders but also closely linked to its stated goals (Peterson, Gijsbers, and Wilks, 2003)

Lebans and Euske (2006) have described the concept of performance in a more detailed manner by developing a set of nine propositions which form a foundation on which the organizational performance is defined, measured and managed Accordingly, performance is a set of financial and non-financial parameters that, taken together, provide information on the firm’s achievements of its objectives It is a dynamic term which needs to be assessed in a continuous manner Besides, performance also can be interpreted differently due to unique view of each evaluator

To put it another way, Colase (2009, p 53) brought forward a relatively general and adequate definition of the word performance He stated “performance” as a

“bag-word” since it “covers various and different notions such as growth, profitability,

return, productivity, efficiency, and competitiveness.” 2.2.2 Firm Performance’s Dimensions and Indicators

In spite of its popularity in strategic management field, there is no universally accepted definition of firm performance Also, one single dimension cannot properly describe the organizational performance concept because of its complexity Therefore, both theoretical perspectives and empirical researches suggest using multidimensional measurement model for firm performance as it reflects a relatively complete perception of performance

which enables the users to compare the performance of different firms Table 2.2 illustrates seven dimensions of the model and their corresponding indicators

Table 2.2 Performance Dimensions and Indicators Selected

(Source: Santos and Brito, 2012)

Multidimensionality suggests dimensions cannot be used interchangeably because each of them reflects different aspects of firm performance (Santos and Brito, 2012) This implication also justifies an idea under stakeholder theory which is different stakeholders would have different demands, therefore, the firm cannot treat them the same

Academic scholars and practicing managers should use the dimensional structure to choose the performance indicators which are most relevant to the firms under their consideration

2.2.3 Financial Performance Measurements

According to Hult et al (2008), financial performance is the most popular measurement for organizational performance in empirical researches Specifically, financial performance could be measured by three methods based on accounting, market value and the mixture of these two values

2.2.3.1 Accounting Measurements

Accounting-based indicator is very useful in measuring a firm’s profitability by comparing it with the firm’s weighted average cost of capital (Al-Matari et al., 2014) Examples of accounting measurements include, but are not limited to, Return on Assets (ROA), Return on Equity (ROE), Profits Margin (PM), Earnings Per Share (EPS), etc

An advantage of accounting indicators is that it is relatively easily to understand as well as compute Therefore, it is used popularly in empirical researches Moreover, accounting-based measurements reflects the results of management activity, therefore, they are preferred over market-based measurement in examining the impacts of corporate governance on financial results (Hutchinson and Gull, 2004; Mashayekhi and Bazazb, 2008) For example, a firm has positive performance with a high ratio of ROA, which indicates the achievements of managers’ actions in the past Conversely, negative results demonstrate the failure of management policies which needs to be reviewed to improve the firm short-run performance

Meanwhile, the market-based measurement could resolve this problem as it reflects the market expectations about firm’s future performance

2.2.3.2 Market Value Measurements

The most widely used market-based indicators include, but are not limited to, Tobin’s Q, Market-to-Book Value (MTBV), Dividend Yield (DY), Price-Earnings ratio (PE), etc Different from accounting measures, market value indicators provide a forward-looking perspective on the long-term performance of companies through investors’ expectations

Joh (2003) asserted that market value is mainly determined by the supply and demand of the stock with available information in the market Therefore, this value may not indicate the actual performance of companies, especially where the stock market is not efficient Moreover, the stock price is also greatly influenced by investors’ psychology which is usually exaggerated Especially in newly developed stock markets, the legal regulations are normally not strict enough, while the market is also not informationally efficient Therefore, stock prices can be easily manipulated by illegal speculative activities, which, in turn, will affect the accuracy of market-based indicators in measuring firm performance In addition, this type of measurement is also affected when the firm issues corporate actions such as stock splits, reverse stock splits, warrants issues, stock dividends, etc., which makes the stock price being adjusted accordingly Hence, the calculation formula of market value measurements becomes very complicated

2.2.3.3 The Mixed Measurements of Accounting Value and Market Value

which are profitability, leverage, liquidity, solvency and activity ratios It is usually applied in anticipating the probability that a company is headed for bankruptcy Although the mixed measurements are relatively popular in empirical studies, their implications are still inconclusive (Al-Matari et al., 2014) It means that some indicators show a positive contribution of corporate governance to the organizational performance, while the others indicate the opposite result

2.3 Empirical Studies on the Relationship between Corporate Governance and Firm Performance

In fact, corporate governance is recognized as one of the most important factors that help improve the company’s performance A well-governed company normally has a low operational risk level, thereby enhancing investors' confidence in the company According to a survey carried out by McKinsey in 2002, 15% of Western European institutional investors paid more attention to the governance practices rather than financial matters Also, 27% of interviewees responded that they are willing to pay an extra of 14% for firms with high corporate governance quality Moreover, according to Jensen and Meckling (1976), firms with good corporate governance tend to operate more efficiently and produce higher expected cash flows in the future

However, the limitation of these studies is the dependence on the availability of secondary data as well as the difficulty in accessing companies’ information from primary sources Meanwhile, according to the second approach, the studies will test the correlation between the variables that constitute the corporate governance mechanism and firm performance indicators, thereby detecting the dominant factors Widely considered constituent variables can be divided into three groups which are (1) Board Characteristics, (2) Executive Board Characteristics and, (3) Ownership Structure variables

2.3.1 Board Characteristics and Firm Performance

volatility of stock returns, which is contrary to companies with large boards Coles et al (2008) also reported the same results

2.3.1.1 Board Size and Firm Performance

The number of board members is usually determined based on the joint stock company laws of each country and the company’s charter When the size of the board is too large, the members are more likely to face a problem called "free rider" That is the situation when some of the board mostly rely on the other members instead of actively involving in the activities of the BOD As a result, the monitoring and controlling activities of the BOD become ineffective A number of studies (such as Jensen, 1993; Yermack, 1996) found evidence consistent with the idea of agency costs which is the smaller board size, the better firm performance These studies suggest that as the size of the board increases, there will be problems in communication and coordination among board members, which reduces the monitoring and controlling capacity of the board members and thus increase the agency costs and reduce firm performance Specifically, Yermack's (1996) found a negative correlation between the size of the board and Tobin's Q The study showed that the value of a company decreases as the size of the board increases from small to medium size Similarly, a research by Randoy et al (2006) also indicated that larger boards have a negative effect on firm performance In contrast, Dalton et al (1998), Lehn et al (2009) found that large-scale BOD has a positive impact on firm performance This is explained as a larger board can help improve the linkages with external resources (Hillman and Dalziel, 2003)

higher, team work and delegation within the board will decrease Besides, an empirical research, which was undertaken by Duc and Thuy (2013) with 325 observations of 77 companies listed on HSX for the period 2006 – 2011, has found out a negative relationship between the size of the BOD and the performance of company

2.3.1.2 Non-Executive Members in Board and Firm Performance

Many empirical researches have emphasized the important role of non-executive board members In particular, Elloumi and Gueyié (2001) asserted that companies with a high proportion of outside directors usually face fewer financial difficulties Moreover, when faced with financial troubles, companies with a highly independent board will be less likely to go bankrupt (Daily et al., 2003) However, Duc and Thuy (2013), in their empirical research, have concluded that the number of non-executive members in board not significantly affect the performance of companies in Vietnam

2.3.1.3 Chairman Ownership and Firm Performance

The relationship between board ownership and firm performance has been studied in many researches However, there is still very little research regarding the influence of chairman’s holding on performance of the company It is argued that the board of directors is ultimately responsible for the operation and financial health of the company As the leader of the board of directors, the chairman has an important role in monitoring and controlling the company In reality, many governance mechanisms and proxy groups encourage the chairman stock ownership Therefore, it is necessary to investigate whether there is a relationship between chairman ownership and organizational performance

chairmen held no share (33 out of 193 companies) even outperform all the other firms based on one-year total share return indicator

In Vietnam, a research conducted by Le and Thi (2016) with a sample of 575 firms listed on HSX and HNX including 1967 observations in the period 2007 – 2012 has shown a completely different relationship Empirical evidence emphasizes that the chairman ownership contributes positively to the performance of company in Vietnam It is explained as when the chairman holds a large percentage of shares, he will be more motivated to improve the firm performance and act in the best interests of shareholders

2.3.2 Executive Board Characteristics and Firm Performance

2.3.2.1 CEO Duality and Firm Performance

chairman position, even abuses his power to obtain personal gain at the expense shareholders

In Vietnam, empirical researches also show dissimilar results In particular, Duc and Thuy (2013), Duc and Tri (2014), Thuy et al (2017) verified that the CEO duality contributes positively to the business performance Meanwhile, Trang (2016), in her empirical research of 187 listed firms in the period 2011-2014, has concluded that there is a negative correlation between duality status and financial performance of the company

2.3.2.2 Executive Board Size and Firm Performance

Meanwhile the size of BOD is widely used as a proxy of corporate governance in many academic studies, there is still very little research on the relationship between the number of manages in executive board and firm performance Especially in the case of Vietnam, there are many family-owned businesses where family members usually join in the board of directors or the executive board Therefore, the impact of executive board size on organizational performance also needs to be concerned Binh and Giang (2014) has conducted a research on 30 listed firms in the official VN30 Index3 for the fiscal year 2011 and concluded that there is no significant relationship between executive board size and firm performance The author explained this result as the board members in Vietnam usually also sit on the executive board, hence, the executive board size is rationally insignificant in explaining the firm performance (Binh and Giang, 2014)

2.3.2.3 CEO Ownership and Firm Performance

In joint-stock companies, there is a clear separation between ownership and control, which leads to the agency problem To encourage managers take actions in the best interests of shareholders, Jensen and Meckling (1976) has recommended that the benefits of managers should be aligned with shareholders through the holdings of

3 The VN30 Index includes 30 stocks listed on the HSX with the highest market capitalization as well as

company shares Similarly, Brickley et al (1988) agreed that stock ownership could be seen as an incentive which promotes managers to operate more effectively Empirical studies undertaken by Adams et al (2009), Elsila et al (2013) also supported this perspective by showing that the managerial ownership is positively related to firm performance

It is clearly that managerial ownership will help the company align the interests between shareholders and managers, thereby reducing agency problems However, Himmelberg (1999) suggested that low managerial ownership would be the optimal incentive plan for firms with low levels of the moral hazard problem Florackis (2008) argued that managerial ownership does not always lead to alignment of interests between shareholders and managers because of the possibility of

“entrenchment effect” as the managers increase their shares holdings It is the case

that, at some level of CEO ownership, the managers tend to exercise insufficient effort or easily make a decision that is good for them in the short-term but harms the company in long-run Moreover, by increasing the percentage of share holdings, managers may be able to avoid competition with high-level labor markets and less likely to be dismissed or fired since they have more voting power Supporting for this perspective, Bhagat and Bolton (2013) has demonstrated that CEOs with large ownership will reduce company performance

In Vietnam, Trang (2016) has found a positive relationship between ownership of managers and firm performance measured by ROA, meanwhile there is no significant impact of CEO ownership on performance measured by Tobin’s Q 2.3.3 Ownership Structure and Firm Performance

Ownership structure can be classified based on its degree of concentration as follow:

to govern the decisions related business operations Therefore, the concentrated ownership structure is considered as an internal mechanism in which the major shareholders can directly control the business by participating in the board of directors and executive board of the company These major shareholders may not own total capital of the firm but still have significant voting rights because they hold the majority of the equity, then still have control over the business

• Ownership dispersion: refers to the case where there is no single investor or a group of investors owns enough shares to dominate the business Small shareholders have little incentive to closely monitor the business operation in daily basis, therefore, the running of the business is delegated to management team and the board of directors However, these minority shareholders still can participate in the decision-making process through their voting rights

Based on the type of owners, ownership structure can be classified as: state ownership, family ownership, foreign ownership, domestic ownership, etc The relationship between the above ownership subjects and firm performance has been studied by many scholars with mixed results

because of a fact that the state holdings is closely associated with the equitization process of state-owned enterprises, however, this progress in Vietnam has always been evaluated as very slow and inefficient Therefore, under this thesis, only ownership concentration and foreign ownership will be considered when examining the ownership structure of companies

2.3.3.1 Ownership Concentration and Firm Performance

The degree of ownership concentration can be measured as the total shareholdings of individual/institutional investors who hold more than a specific level of ownership The direct participation in monitoring and controlling the firm of large shareholders is the manifestation of ownership concentration Shleifer and Vishny (1997) suggested that major shareholders contribute to the supervision and control of day-to-day business activities to minimize the agency costs Moreover, Kang and Shivdasani (1995) concluded that there is a positive relationship between ownership concentration and firm performance in Japanese companies, while Gorton and Schmid (2000) also found the similar effect in Germany Other scholars such as Berle and Means (1932), Jensen and Meckling (1976), Wruck (1988), and Mehran (1995) also supported this perspective

However, there exists a contradictory view on the impact of large shareholders on the performance of company There are at least two shortcomings of a concentrated ownership structure Firstly, minority shareholders will suffer serious consequences from major shareholders’ misuse of company assets for their personal gain Secondly, the tight control of business operations from large shareholders may limit the performance of managers as they will become less flexible and proactive It also causes the managers to make fewer initiatives in their decisions, thereby reducing firm performance (Burkart et al., 1997)

concentration and firm performance They also pointed out that the average concentration ownership is about 50% in Vietnamese listed firms, which currently contributes positively to the performance of companies

2.3.3.2 Foreign Ownership and Firm Performance

Douma et al (2006) examined how the foreign ownership affects firm performance with a sample of 1005 companies in a large emerging market as India for the fiscal year 1999-2000 The research result showed a positive correlation between foreign ownership and performance of the company Similarly, Aydin et al (2007) also conducted an empirical research in Turkey and found a positive effect of foreign ownership on firm performance This is explained as foreign investors with large shareholdings tend to have high degree of commitment and long-term involvement They not only provide the company a large amount of capital investment but also transfer new technologies and perform human resource training Foreign investors also play an important role in effectively monitoring the managers Therefore, foreign investors can make a positive contribution to the domestic enterprise that they invested in

However, Andow and David (2016) found that foreign ownership is negatively, strongly and significantly (at 1% level of significance) influencing the performance of company According to the authors, in some cases, the presence of foreign investor is only for the purpose of hindering managers’ work and preparing for the expropriation of firm values Therefore, they suggested that the foreign ownership should not exceed the domestic ownership to ensure no opportunities for foreign investors to usurp the company As the foreign shareholdings are large enough, they can use their power to pressure the managers to act in their own interests and harm small shareholders (Phung and Mishra, 2016)

performance of company at 5% level of significance Le and Thi (2016) also indicated the same relationship They asserted that foreign ownership could be seen as the most important factor affecting listed companies in Vietnam, where foreign capital has become a major driver for economic growth

2.4 Research Gap

In reality, the impacts of corporate governance on firm performance have been examined by plenty of theoretical and empirical researches around the world since a long time ago However, Vietnam is still an under-researched country in the field of corporate governance (Lien and David, 2014) Many studies on corporate governance have been undertaken in the developing countries and Vietnam’s neighbors in the Asia-Pacific region, however, Vietnam is usually not included In the past few years, Vietnam has begun to be mentioned in several reports on corporate governance of international institutions such as IFC, OECD, World Bank, etc However, there is still little research on corporate governance in Vietnam, especially regarding its impacts on the performance of companies Besides, as mentioned earlier in the Introduction section, Vietnamese corporate governance system is characterized by a mixture of family-based and government-based system, which is very different from market-based system of Western developed countries The empirical evidences also show that the impacts of corporate governance on firm performance differ among countries This can be explained due to the differences in business management culture and legal system of each nation There would be no “one size fits all” model which is appropriate to all countries For the above reasons, more thorough studies on the impacts of corporate governance on firm performance are urgently needed in the situation of poor corporate governance quality in Vietnam

used in any previous studies to confirm available results or bring forward new findings

CHAPTER RESEARCH METHODOLOGY AND DESIGN

3.1 Research Methodology

The aim of this dissertation is to examine the relationship between corporate governance and firm performance based on panel data of listed companies in Vietnam In order to achieve that objective, a quantitative research was undertaken because it is mostly appropriate for a researcher who is seeking to understand the linkages between variables (Creswell, 2003) Under the quantitative method, corporate governance and firm performance can be measured and quantified by numbers with large samples However, several aspects of these subjects are apparently not measurable by numbers through statistics Therefore, it should be aware that using quantitative in this case may limit the completeness of research subjects’ analysis

This thesis was carried out under the deductive or top-down approach, which means that it will test theories through several hypotheses and observations This approach is also often linked to datasets or quantitative analysis

3.2 Research Design

3.2.1 Variables

3.2.1.1 Dependent Variables

will measure the organization performance through only the financial aspect with the use of four indicators, namely, ROA, ROE, Tobin’s Q and Z-score by Altman

• Return on Asset (ROA) and Return on Equity (ROE)

Both ROA and ROE reflect the effectiveness of a company in using its assets and equity to generate incomes While the former indicates firm’s profitability by shareholders and all of the stakeholders (Zabri, Ahmad and Wah, 2016), the latter only represents the profits generated from shareholders’ investments In general, the higher these ratios are, the more efficient the firm is being managed

Although these two ratios are widely used in academic researches to examine the short-term effects of governance practices on business performance, they are still challenged by some scholars as they are heavily affected by accounting standards

• Tobin’s Q

Similar to the above two measurements, Tobin’s Q is also frequently used as a proxy for firm performance in various empirical studies regarding corporate governance such as Yermack (1996), Bhagat and Bolton (2008), and Klapper and Love (2004) It was firstly introduced by the economist Nicholas Kaldor in 1966 However, it was not until 1977 that this ratio became widely popularized by James Tobin – a Nobel Prize winner in economics Under its original formula, it is calculated as follows:

recorded value in balance sheet If Tobin’s Q is higher than 1.0, the market value of company is greater than its accounting book value It indicates that the market value may reflect the assets which has not been recorded in the book value, which makes the company become more attractive to investors Conversely, a Tobin’s Q, which is less than 1.0, suggests that the firm is utilizing its assets inefficiently then investors are less willing to invest in it

Since the procedure to obtain Tobin’s Q according to the above original formula is very complicated and cumbersome, especially for estimating the replacement cost of total assets, most of studies has used the simplified versions as a proxy for this ratio Lemmon and Lins (2001), in their empirical research on corporate governance, has modified the Tobin’s Q formula to measure firm value more conveniently as following:

Due to the availability of data, the above formula will be employed in this thesis By using Tobin’s Q as an indicator of firm performance, the author suppose that a good corporate governance mechanism will bring values and benefits to the firm However, these added-values are not recorded in the balance sheet, thereby creating a discrepancy between market value and book value of the firm In brief, companies with better governance mechanisms are expected to be valued by the market more than sum of accounting value

• Z-score by Altman

Z-score is a common example of mixing between accounting value and market value, therefore it can be considered as a better version of both traditional measurements Z-score was originally developed by Altman in 1968 It is usually applied in anticipating the probability that a company is headed for bankruptcy Its original formula was proposed as follows:

In which:

• X1 = Working capital / Total assets

• X2 = Retained earnings / Total assets

• X3 = Earnings before interest and taxes / Total assets

• X4 = Market value of equity / Book value of total liabilities

• X5 = Sales / Total assets

Usually, a score of less than 1.8 indicates that a company is in financial distress and likely going for bankruptcy In the contrary, firms with scores above are considered relatively “safe” and unlikely to experience bankruptcy A score falling between 1.8 and not bring a clear conclusion as the company has a moderate probability of filing for bankruptcy

According to Altman, Hatzell and Peck (1995), Z-score has high degree of accuracy in assessing corporate financial health not only in the United State but also in the emerging markets Besides, Chang (2009) argued that poor management practices and corporate governance breakdowns were significant contributing factors on the collapses of many companies in the past Therefore, a good corporate governance is essential for a firm to enhance its ability to deal with financial distresses That is also the reason why Z-score is increasingly used as a proxy for financial performance in recent empirical researches on corporate governance of Bhagat and Bolton (2007), Shahwan (2015), Hanani and Dharmastuti (2015), and Irma et al (2015)

3.2.1.2 Independent Variables

Based on theoretical and empirical evidence on the relationship between corporate governance and firm performance as well as the availability of information, this thesis proposes the following variables to assess the corporate governance mechanism of a company:

• Board Characteristics Variables:

o Non-Executive Members in Board (NEXE): is the number of non-executive members in board of directors

o Chairman Ownership (OCHA): is the share percentage owned by the chairman of board of directors

• Executive Board Characteristics Variables:

o CEO Duality (DUAL): is a dummy variable which is equal if the CEO also serves as the chairman of BOD Otherwise, it is equivalent to

o Executive Board Size (ES): is the number of members on the executive board

o CEO Ownership (OCEO): is the share percentage owned by the CEO • Ownership Structure Variables:

o Ownership Concentration (OCON): is the total ownership of individual or institutional investors who hold more than 5% of company’s share This share percentage reflects the degree of ownership concentration in a firm

o Foreign Ownership (OFRN): is the share percentage owned by foreign investors

3.2.1.3 Control Variables

In addition to the influence of independent variables on dependent ones, the performance of enterprises is also affected by the internal environment as well as external factors Based on previous empirical studies, the author will add two control variables into the models to better explain the firm performance, which are firm size (FSIZE) and firm leverage (FLEV)

• Firm size (FSIZE)

firm performance On the contrary, Nenova (2003) and Garen (1994) suggested that larger companies tend to be placed under stricter supervision and extensive scrutiny Besides, Agrawal and Knoeber (1996) found that firm size has a negative impact on its performance They explained it as bigger companies may not be efficient as smaller ones because of their large scales, which make them more difficult to control the business strategies and operations

• Firm leverage (FLEV)

Jensen and Meckling (1976) proposed that leverage plays an important role leverage in mitigating agency problem Similarly, Jensen (1986) claimed that raising external debt can have a positive impact on firm performance as the managers will need to be more conservative in making investments However, Myers (1977) argued that high financial leverage negatively affects the performance of company because excessive borrowings will reduce the ability to issue new debts Besides, Andrade and Kaplan (1998) claimed that the higher leverage used, the less effectively companies tend to perform

Figure 3.1 below illustrates the analytical framework of this research

(Source: Author’s compilation) Firm Performance:

• ROA • ROE • Tobin's Q • Z-score

(6) CEO Ownership (5) Executive Board Size (4) CEO Duality

(3) Chairman Ownership

(2) Non-executive members on BOD

(7) Ownership Concentration (1) Board Size

(8) Foreign Ownership

Table 3.1 summarizes all the variables used in this dissertation

Table 3.1 Summary of All Variables Used in the Dissertation

Variables Definition Measurement Dependent variables

ROA Return on Assets Earning after tax

Total assets

ROE Return on Equity Earning after tax

Total equity

Q Tobin’s Q Market capitalization + Total debt

Total assets

Z Z-score ratio Z-score model of Altman (1968)

Independent variables

BS Board Size Number of members on board of director

NEXE Non-Executive

Members on BOD

Number of non-executive members on BOD

OCHA Chairman Ownership Share percentage owned by Chairman of

BOD

DUAL CEO Duality Coded “1” if the CEO also serves as the

chairman of BOD and “0” for other cases

ES Executive Board Size Number of members on executive board OCEO CEO Ownership Share percentage owned by CEO

OCON Ownership

Concentration

Total ownership of individuals/institutions with more than 5% of shares

OFRN Foreign Ownership Share percentage owned by foreign

investors

Control variables

FSIZE Firm Size Natural logarithm of firm’s total assets4 FLEV Firm Leverage Ratio of total debt divided by total equity

(Source: Author’s compilation)

4 Firm size variable is measured by natural logarithm of total assets in order to reduce its high dispersion

3.2.2 Models and Hypotheses

Based on theoretical and previous empirical studies, the author proposes four quantitative models which includes all the variables described above as follows:

(1) ROAit = a0 + b1BSit + b2NEXEit + b3OCHAit + b4DUALit + b5ESit + b6OCEOit

+ b7OCONit + b8OFRNit + b9FSIZEit µ + b10FLEVit + µit

(2) ROEit = a0 + b1BSit + b2NEXEit + b3OCHAit + b4DUALit + b5ESit + b6OCEOit

+ b7OCONit + b8OFRNit + b9FSIZEit µ + b10FLEVit + µit

(3) Qit = a0 + b1BSit + b2NEXEit + b3OCHAit + b4DUALit + b5ESit + b6OCEOit +

b7OCONit + b8OFRNit + b9FSIZEit µ + b10FLEVit + µit

(4) Zit = a0 + b1BSit + b2NEXEit + b3OCHAit + b4DUALit + b5ESit + b6OCEOit +

b7OCONit + b8OFRNit + b9FSIZEit µ + b10FLEVit + µit

where i represents one specific company and t represents the year Along with that, eight hypotheses are proposed including:

• H1: There is a negative relationship between board size and firm

performance

Although the empirical results on the relationship between board size and firm performance are quite dissimilar around the world, it is relatively identical for the case of Vietnam Specifically, Truong et al (1998), and Duc and Thuy (2013) all agreed that the size of BOD has a negative impact on the performance of company, which is explained as the result of the “high power distance” culture in Vietnam These findings also confirms the view of stewardship theory Therefore, the author supposes that there is a negative relationship between board size and firm performance

• H2: There is a positive relationship between number of non-executive

members in BOD and firm performance

However, it cannot deny the importance of non-executive member as it enhances the independence of BOD in controlling and monitoring the executives Therefore, the author hypothesizes that the number of non-executive board members has a positive impact on the firm performance Although this assumption agrees with the agency theory on encouraging the presence of independent members on the board of directors, it does not support for the stewardship theory

• H3: There is a positive relationship between chairman ownership and firm

performance

Le and Thi (2016) argued that chairman ownership contributes positively to the performance of company in Vietnam as it encourages the chairman act in the best interests of shareholders as well as the company Therefore, chairman stock ownership could be considered as a governance mechanism that encourages the chairman work harder to improve the firm performance For that reason, a positive relationship between chairman ownership and organizational performance has been hypothesized

• H4: There is a negative relationship between CEO duality and firm

performance

agency costs and reducing operational efficiency Therefore, this dissertation expects that the duality status would have negative impact on the performance of companies in Vietnam This conjecture seems to oppose to the stewardship theory suggestions

• H5: There is a positive relationship between executive board size and firm

performance

There has been relatively little empirical research on the linkage between executive board size and firm performance both in Vietnam and in the world According to Binh and Giang (2014), there is no significant relationship between these two subjects on a sample of 30 listed firms in the official VN30 Index However, other researches on the same topic indicate that there exists a relationship between top management team size and organizational outcome Specifically, Eisenhardt and Schoonhoven (1990) argued that larger management teams promote growth for new businesses Similarly, Haleblian and Finkelstein (1993) found that firms with larger top management teams outperform other firms during turbulent periods Therefore, in a scope which is broader than the VN30 Index, the author expects that executive board size positively affects to the firm performance as larger teams will enable the firm with more capabilities and resources • H6: There is a positive relationship between CEO ownership and firm

performance

• H7: There is a positive relationship between ownership concentration and

firm performance

Berle and Means (1932), Jensen and Meckling (1976), Wruck (1988), and Mehran (1995) argued that ownership concentration has positive impact on firm performance because large shareholders are directly involved in the monitoring and controlling of firm’s daily operation, thereby reducing agency costs These findings also confirm the agency theory perspective that large shareholders could be a remedy for the agency problem in companies In Vietnam, according to Duc and Thuy (2013), large shareholders have no impact on the firm performance However, Le and Thi (2016) found that ownership concentration contributes positively to the performance of company Thus, the author supposes that there is a positive relationship between ownership concentration and firm performance in listed company in Vietnam Although, this assumption agrees with the agency theory, it does not support for the view of stakeholder theory as this theory suggests a dispersed ownership mechanism to represent the diverse interests of various stakeholder groups

• H8: There is a positive relationship between foreign ownership and firm

performance

3.2.3 Data Collection

The sample was formed by collecting data of 100 companies listed on the Hochiminh Stock Exchange (HSX) and Hanoi Stock Exchange (HNX) from the year 2015 to 2019 (5-year period) As noted earlier, financial companies such as banks, insurance companies and other financial institution have been excluded due to their distinct requirements in capital structure and operations

Financial ratios such as ROA, ROE and control variables (including firm size (FSIZE) and firm leverage (FLEV)) were derived from the audited financial statements of these companies Meanwhile, all the corporate governance variables such as the board size (BS), CEO duality status (DUAL), etc were collected from the annual reports and official websites of companies Since both Tobin’s Q and Z-score incorporate the market value factor in their calculation, then the company’s fiscal year-end stock price has been used These stock prices were provided by the VietData – a joint stock company specialized in providing macro and financial data in Vietnam

However, it should be noted that the presentation of financial statements as well as annual reports of companies are not identical In addition, there were also newly listed or delisted firms during the research period As a result, the sample has many missing values which directly affected the models under consideration Therefore, after screening the collected data and removing incomplete ones, the final sample consisted of 97 listed companies and a total of 443 observations, which is organized into an unbalanced panel data set

3.2.4 Data Presentation

Table 3.3 Descriptive statistics of variables

Observations Mean Standard

Deviation Min Max ROA (%) 443 10.06 9.79 -25.26 60.23

ROE (%) 443 16.97 13.59 -45.48 79.41

Q 443 1.71 1.31 0.40 9.05

Z 443 5.84 9.10 -0.18 68.98

BS 443 6.29 1.56 3.00 13.00

NEXE 443 4.60 1.62 1.00 13.00

OCHA (%) 443 11.29 15.43 0.00 81.77

DUAL 443 0.24 0.43 0.00 1.00

ES 443 4.45 1.80 2.00 12.00

OCEO (%) 443 6.17 10.60 0.00 50.58

OCON (%) 443 58.34 22.60 0.00 99.40

OFRN (%) 443 19.12 18.01 0.00 80.49

FSIZE 443 28.98 1.48 23.78 32.25

FLEV 443 1.11 0.99 0.03 6.18 (Source: Author’s compilation based on results obtained from R software) Table 3.3 shows that ROA has a relatively wide interval between value of -25.26% and max value of 60.23% with a mean of 10.06% Similarly, ROE also has a wide range from -45.48% to 79.41% with an average value of 16.97% Tobin’s Q has a mean value of 1.71 with standard deviation of 1.31, while these figures are 5.84 and 9.10 respectively for Z-score In general, listed companies in the sample has performed relatively well during the investigated period

role of the chairman of BOD and the CEO The ownership level of CEO is relatively low with an average value of 6.17%, which is lower than the ownership of chairman and foreign investors, namely 11.29% and 19.12% Moreover, the ownership concentration is 58.34% on average and has a wide range from to 99.4%

3.2.5 Methodological Approach

After finishing the data collection and all the calculation of financial ratios by Microsoft Excel, a statistical software called R will be used to analyze the correlation among variables as well as to run the regression models with the above dataset

3.2.5.1 Correlation Analysis

The Pearson’s correlation coefficient, which was firstly proposed by Francis and Galton, was calculated by dividing the covariance of the two variables by the product of their standard deviations The correlation coefficients can range from -1 to +1, in which -1 implies a perfect negative relationship, +1 implies a perfect negative relationship, meanwhile implies there is no relationship between these two variables The thesis will construct a correlation matrix to examine the correlation coefficients between variables According to Gujarati (1995) and Kumari (2008), as the absolute value of the correlation coefficient exceeds 0.8, there will be multicollinearity problem among factors The results of the correlation matrix will be used to determine which variables will be selected to be included in the regression model

3.2.5.2 Regression with Panel Data

can be summarized into two main points as follow: (1) Panel data brings a larger number of observations, thereby decreasing the collinearity among independent variables and enhancing the efficiency of econometric estimates; (2) Panel data allows researchers to identify and measure a number of important economic relations that cannot be identified and measured using cross-sectional or time-series data sets

Three most popular regression models with panel data include:

• Pooled Ordinary Least Square (Pooled OLS): Pooled OLS is a regression model in which both intercepts and slopes are constant across cases and over time This is the simplest approach because it does not consider the effects over individuals as well as time of panel data and only estimates according to conventional OLS regression Therefore, this model may produce unreliable results and distort the real picture of relationships between dependent variables and independent variables

• Fixed Effects Model (FEM): The FEM admits that each individual or unit may have its own unique feature, therefore the intercept in this regression model is allowed to differ among individuals FEM is appropriate in situations that the individual specific intercept correlates with one or more regressors One drawback of the FEM is that it loses many degrees of freedom as the number of cross-sectional units increases

REM is preferred in cases that the (random) intercept of each cross-sectional unit is uncorrelated with the regressors (Gujarati, 2015)

To decide which is the best among the above three approaches, the following tests will be undertaken to choose the one that best fits the observed data:

• Hausman test: To decide between FEM or REM, Hausman test will be deployed In general, it will examine whether the unique errors are correlated with the regressors In Hausman test:

H0: the unique errors are uncorrelated with the regressors

Ha: the unique errors are correlated with the regressors

If the p-value is significant (p-value<0.05), the null hypothesis (H0) is

rejected, which indicates that FEM is more appropriate Otherwise, REM will be the preferred model

• Breusch-Pagan Lagrange Multiplier (LM) test: To decide between REM and Pooled OLS, LM test will be undertaken In LM test:

H0: variances across entities is zero

Ha: variances across entities is different from zero

If the p-value is significant (p-value<0.05), the null hypothesis (H0) is

rejected, which indicates that there is significant difference across units then REM will be preferred Otherwise, Pooled OLS will be more appropriate • F-test: To decide between FEM and Pooled OLS, F-test will be performed

In F-test:

H0: all of the coefficients equal zero

Ha: at least one coefficient is different from zero

If the p-value is significant (p-value<0.05), the null hypothesis (H0) is

rejected, which indicates that FEM will be the preferred model Otherwise, Pooled OLS is more appropriate

Breusch-Pagan test to check for Heteroskedasticity If defects are detected,

CHAPTER FINDINGS AND DISCUSSIONS

4.1 Correlation Matrix

Table 4.1 below presents the correlation coefficients among independent variables and control variables in four regression models It can be clearly seen that there is no significant relation among independent variables and control variables as all correlation coefficients is less than 0.8 The highest coefficient of correlation matrix is approximately 0.78 which presents the relationship between the board size (BS) and number of non-executive members in board (NEXE) In general, it can be concluded that the models not contain multicollinearity Therefore, all the proposed variables will be included in regression models

Table 4.1 Correlation Matrix

(Source: Author’s compilation based on results obtained from R software)

For the group of executive board characteristics, it seems that all related variables negatively affect the performance of company, except the positive linkages between two pairs of variables which are: the duality status (DUAL) and ROE; and executive board size (ES) and Tobin’s Q

In addition, the influence of ownership structure variables on organizational performance is also relatively similar as these variables has positive impact on all types of performance measurements

4.2 Regression Results

4.2.1 Selection of Regression Model

In panel data analysis, it is necessary to perform several tests to choose an appropriate regression model which can produce unbiased and efficient estimations

4.2.1.1 Hausman test

As mentioned earlier, both FEM and REM are widely used in panel data regression analysis However, the choice of preferred model depends on the result of Hausman test (Baltagi, 2005) According to Greene (2012), Hausman test is an effective tool for determining characteristics of the more appropriate model Table 4.2 summarizes the results of Hausman test for four regression models: (1) ROA, (2) ROE, (3) Q and (4) Z The detailed results which are obtained directly from R software will be disclosed in the Appendix A-1

Table 4.2 Results of Hausman Test

Model (1) ROA (2) ROE (3) Q (4) Z Chi-square 17.54 24.77 14.87 27.41

P-value 0.0633 0.0058 0.1368 0.0022

(Source: Author’s compilation based on results obtained from R software)

FEM is more appropriate for these two models On the contrary, REM will be the preferred approach for model (1) ROA and (3) Q

4.2.1.2 Breusch-Pagan Lagrange Multiplier test

The Breusch-Pagan Lagrange Multiplier (LM) test was developed to examine the random effects (Greene, 2003) This test is performed for the purpose of deciding between random effects regression and Pooled OLS regression The null hypothesis in LM test assumes that variances across entities equal zero, which indicates no significant difference across entities or, in other words, no panel effect Table 4.3 summarizes the results of LM test for regression models The detailed results which are obtained directly from R software will be disclosed in the Appendix A-2

Table 4.3 Results of LM Test

Model (1) ROA (2) ROE (3) Q (4) Z Chi-square 380.24 314.94 247.83 311.12

P-value 2.2e-16 2.2e-16 2.2e-16 2.2e-16

(Source: Author’s compilation based on results obtained from R software)

Based on the results above, all the p-value is less than 0.05 then the null hypothesis (H0) will be rejected, which indicates that there is significant difference across units

then REM is more appropriate than Pooled OLS for all models

4.2.1.3 F-test

To decide between FEM and Pooled OLS, F-test will be performed Table 4.4 summarizes the results of F-test for regression models The detailed results which are obtained directly from R software will be disclosed in the Appendix A-3

Table 4.4 Results of F-test

Model (1) ROA (2) ROE (3) Q (4) Z F-statistic 3.06194 2.42532 2.02277 2.68977

P-value 0.000959 0.008367 0.030278 0.003457

Based on the results above, all the p-value is less than 0.05 then the null hypothesis (H0) will be rejected, which indicates that FEM is more appropriate than Pooled

OLS for all models

In summary, according to the above three tests, REM is the most appropriate approach for the model (1) ROA and (3) Q Meanwhile, FEM will be applied to the model (2) ROE and (4) Z The next section will perform another two tests to detect the defects (if any) of these regression models

4.2.2 Regression Diagnostics

4.2.2.1 Serial Correlation Testing

According to Greene (2012), serial correlation (or simply autocorrelation) often occurs in time-series regression models among the error terms The presence of serial correlation makes the variance of coefficient estimates biased, thereby producing ineffective coefficient estimates Wooldridge (2002) argued that serial correlation correlation testing in panel data is necessary if the number of time periods is more than or equal

Wooldridge test has been performed for regression equations and the results are summarized in the Table 4.5 below The detailed results which are obtained directly from R software will be disclosed in the Appendix A-4

Table 4.5 Serial Correlation Testing

Model (1) ROA (2) ROE (3) Q (4) Z Chi-square 0.285 0.090 19.156 21.457

P-value 0.5935 0.7639 1.205e-05 3.619e-06

(Source: Author’s compilation based on results obtained from R software)

From the table above, p-value under the model (3) Q and (4) Z is less than 0.05 then the null hypothesis (H0) will be rejected, which indicates that serial correlation is

4.2.2.2 Heteroskedasticity testing

One important assumption of the classical linear regression model is that the variance of each error term ui is constant or homoscedastic, which means they have the same variance According to Greene (2012), heteroskedasticity can occur in both cross-sectional data and time-series data This phenomenon leads to ineffective estimations (Baltagi, 2005) When the variance of error term changes, the coefficient estimates are still unbiased, however, the variance of the coefficient estimates is biased Consequently, the standard error will no longer be reliable, and therefore, the confidence interval and results of hypothesis testing are also no longer valid

Breusch-Pagan test has been performed for regression equations and the results are summarized in the Table 4.6 below The detailed results which are obtained directly from R software will be disclosed in the Appendix A-5

Table 4.6 Heteroskedasticity Testing

Model (1) ROA (2) ROE (3) Q (4) Z

BP 2349.4 1277.5 2392 5314.8

P-value 2.2e-16 2.2e-16 2.2e-16 2.2e-16

(Source: Author’s compilation based on results obtained from R software)

From the table above, all the p-value is less than 0.05 then the null hypothesis (H0)

will be rejected, which indicates that heteroskedasticity is detected in all models 4.2.3 Results of Regression Models

The testing results of regression diagnostics above show all models suffer from heteroskedasticity Moreover, serial correlation is also detected in the model (3) Q and (4) Z These results indicate that it is necessary to control for these problems with another method instead of making estimations with REM or FEM only

order to correct for these problems, the Feasible Generalized Least Squares (FGLS) method is recommended as it can control the serial correlation and heteroskedasticity (Judge et al., 1988; Wooldridge, 2002) This method is proposed by Parks (1967), and then is widely disseminated by Kmenta (1986) However, another method called Panel Corrected Standard Errors (PCSE) is considered being more appropriate and providing more accurate results than FGLS method when the sample size is small (Beck and Katz, 1995) Moreover, Reed and Ye (2011) also pointed out that FGLS is a good method for estimating efficiently, however, it makes mistakes in constructing confidence intervals On the basis of overcoming these limitations of FGLS method, Beck and Katz (1995) have proposed another approach which bases on the OLS coefficient estimates and replaces the standard errors of OLS estimation by the corrected standard error in panel data For these reasons, the PCSE method is the most appropriate method for regression of panel data in this dissertation

Table 4.7 Regression Results by Using PCSE Method

Independent

Variables (1) ROA (2) ROE (3) Q (4) Z

BS -0.257 0.315 -0.075** -0.919***

NEXE 0.773*** 0.512 0.177*** 1.684***

OCHA -0.081*** -0.105*** 0.003 -0.009

DUAL 1.398 4.499*** 0.107 -1.543***

ES 0.186 0.041 0.111*** 0.527***

OCEO -0.007 -0.063 -0.012* 0.033

OCON 0.067*** 0.048** 0.010*** 0.026**

OFRN 0.035 0.010 0.008*** 0.036***

FSZIE -1.271*** -0.557 -0.085** -2.366***

FLEV -3.490*** -2.035*** -0.303*** -1.804***

After correcting for serial correlation and heteroskedasticity problems by PCSE method, regression results of models (1) ROA, (2) ROE, (3) Q and (4) Z are summarized in the Table 4.7 above The detailed results which are obtained directly from R software will be disclosed in the Appendix A-6

According to the above regression results, all the independent variables (8 out of 8) have significant impacts on firm performance variables at the 10% significant level In which, corporate governance variables, namely NEXE, ES, OCON and OFRN, have positive relationship with organizational performance, while the other three variables, including BS, OCHA, and OCEO, show the opposite direction of influence Notably, the variable DUAL indicates conflicting directions of impact under two models: (2) ROE and (4) Z In general, in can be concluded that all the corporate governance factors which are examined in this dissertation have significant impacts on the performance of company They are: board size, non-executive members on board, chairman ownership, CEO duality, non-executive board size, CEO ownership, concentration ownership and foreign ownership

Besides, the two control variables which the author has included in the model for better explaining dependent variables also show relations with the performance of company Specifically, both FSIZE and FLEV have negative impacts on firm performance at the 1% significant level It means that as the company becomes larger in term of total assets or it issues more debts, its financial performance tends to be reduced

Table 4.8 Regression Results without Control Variables under PCSE Method

Independent

Variables (1) ROA (2) ROE (3) Q (4) Z

BS -0.370 0.252 -0.085** -1.002***

NEXE 0.870*** 0.598 0.190*** 1.461***

OCHA -0.085*** -0.108*** 0.003 -0.002

DUAL 0.100 3.677*** -0.015 -1.614***

ES -0.735*** -0.428** 0.040 -0.582***

OCEO 0.033 -0.036 -0.008 0.018

OCON 0.062*** 0.045** 0.009*** 0.017

OFRN 0.032 0.010 0.008*** 0.016

Intercept 8.159*** 12.264*** 0.453 6.781*** Significance codes: (***) p < 0.01; (**) p < 0.05; (*) p < 0.1;

(Source: Author’s compilation based on results obtained from R software)

Basically, the regression results are relatively consistent to the previous results of models which include two control variables Three corporate governance variables, namely NEXE, OCON and OFRN, still show their positive impacts on organizational performance Similarly, the other two variables, BS and OCHA, also indicates the same results with regression models with control variables as they still contribute negatively to the firm performance The only one different indication is that the executive board size (ES) negatively affects the firm performance when the control variables are excluded Meanwhile, it positively correlates with Tobin’s Q and Z-score at the 1% significant level under models with control variables This can be explained as there exists a strong positive correlation between ES and the control variable FSIZE, which can be confirmed through a relatively high correlation coefficient of 0.45 between these two variables (see Table 4.1) Therefore, under the models with FSIZE as a control variable, ES has shown a positive relationship with dependent variables

Although there are differences in the measurement methods of the four dependent variables, these regression models show relatively similar results on the directions of significant impacts (except for the variable DUAL) Table 4.9 compares the expected signs of each independent variable in hypotheses proposed earlier with its empirical results under regression models

Table 4.9 Summary of Expected Signs and Regression Results of Models

Independent Variables

Expected Signs

Regression Results

(1) ROA (2) ROE (3) Q (4) Z

BS - N N - (**) - (***)

NEXE + + (***) N + (***) + (***)

OCHA + - (***) - (***) N N

DUAL - N + (***) N - (***)

ES + N N + (***) + (***)

OCEO + N N - (*) N

OCON + + (***) + (**) + (***) + (**)

OFRN + N N + (***) + (***) Significance codes: (***) p < 0.01; (**) p < 0.05; (*) p < 0.1;

(Source: Author’s compilation based on results obtained from R software)

• Board Size (BS): For the firm performance as measured by Tobin’s Q and Z-score, the regression result shows that the hypothesis H1 can be accepted at

distance” culture For the ROA and ROE models, the board size does not show any significant relationship Although, this result is different from a previous study of Duc and Thuy (2013) who claimed that board size has negative impact on firm performance as measured by ROA, it is consistent with another research of Duc and Tri (2014) who concluded that there is no significant relationship between board size and ROA or ROE The author believes that this finding is reasonable in the context of Vietnam where the corporate governance system is typically family-based or government-based system Therefore, in most cases, these interest groups can significantly influence the appointment of BOD members according to their preferences which are largely affected by personal relationships or socio-political objectives rather than the actual needs of the company itself or the working experiences and skills of members As a result, the board size does not reflect its role in managing businesses, thereby not causing any effects on the organizational performance as proxied by ROA or ROE

• Non-Executive Members on Board (NEXE): Regression results show that the number of non-executive members on board has positive correlation with ROA, Tobin’s Q and Z-score at 1% significant level Although under the ROE model, non-executive members variable does not show significant result, the sign of coefficient is also positive This result is consistent with the agency theory as well as previous researches of Elloumi and Gueyié (2001), and Daily et al (2003) In Vietnam, Duc and Thuy (2013) have concluded that there is no relationship between non-executive members on board and firm performance as measured by ROA Therefore, the findings under this thesis are relatively new in Vietnamese listed firms It can be explained as the presence of non-executive members on board will enhance the independence of BOD in controlling and monitoring the managers, thereby improving the performance of company

ROE with confident level at 99%, therefore, the hypothesis H3 is rejected

under the model (1) and (2) at 1% significant level The declines of ROA and ROE with chairman ownership reflects “entrenchment effect” which occurs when the chairman gain so much power through their high percentage holdings that they make decisions in their own best interests and ignore other shareholders’ interests For the other two dependent variables Tobin’s Q and Z-score, chairman ownership does not show any significant relationship This finding is different from a previous research of Le and Thi (2016) which concluded that there is a positive relationship between chairman ownership and firm performance as measured by Tobin’s Q However, the author believes that the findings under this thesis are consistent with the current situation of the Vietnam where the cognitive level of corporate governance, in general, is still very low In reality, not only the listed companies themselves but also the investors in stock market have not been fully aware of the importance of corporate governance for companies’ long-term development Therefore, investors in Vietnamese stock market even not care about the chairman holdings of shares when they make investments As a result, there is no basis to determine the impact of chairman ownership on firm performance which incorporates market factor such as Tobin’s Q and Z-score

could be explained as, through the eyes of stock market investors, the combination of these two positions may create the moral hazard issues in the company, thereby reducing the firm efficiency However, more time is needed to make further assessments on the relationship between CEO duality and organizational performance in Vietnam, especially for performance measurements which incorporate market value factor such as Tobin’s Q and Z-score

• Executive Board Size (ES): For executive board size, it is found to have positive relationship firm performance measured by Tobin’s Q and Z-score at 1% significant level However, for the other two models (ROA and ROE), executive board size does not show any significant impacts This result is consistent with a previous study of Binh and Giang (2014) who have concluded that there is no significant relationship between executive board size and firm performance as measured by ROE Binh and Giang (2014) claimed that it is due to a very common situation in Vietnamese enterprises which is the board of directors is normally also in charge of the executive board As a result, executive board size is rationally insignificant in the model with ROE as a dependent variable Meanwhile, the finding of a positive relationship between executive board size and firm performance as measured by Tobin’s Q and Z-score is relatively new in Vietnam This result can be explained as under the eyes of investors in stock market, larger top management teams will enable listed firm with more capabilities and resources, thereby enhancing the effectiveness of companies

• CEO Ownership (OCEO): For firm performance as measured by ROA, ROE or Z-score, managerial ownership does not reflect any significant impact Meanwhile, model (3) shows that CEO ownership has negative correlation with firm performance proxied by Tobin’s Q with confident level of 90% Although, this result is contrary to the proposed hypothesis (H6), it is

percentage of their company shares, they tend to act for their own benefits rather than the interests of other shareholders in the company because they have more information They even may dominate the decision-making processes of board of directors and other members in executive board Therefore, investors in stock market often have negative views on financial performance of company when the CEO ownership is high Besides, the goals of these managers are usually associated with financial investments It means that they seek for opportunities to benefit from stock inflations instead of focusing on enhancing the efficiency of the company even though they have rights to manage the firm That is the reason why for accounting measurements such as ROA and ROE, or for mixed measurements as Z-score, CEO ownership does not display any significant relationship

• Ownership Concentration (OCON): Regression results indicate that ownership concentration has positive impact on firm performance as proxied by all four measurements at 5% significant level This result is consistent with previous studies of Kang and Shivdasani (1995), Gorton and Schmid (2000), and Le and Thi (2016) who found the similar effect in Japan, Germany, and Vietnam respectively According to empirical results in this dissertation, the average concentration ownership in Vietnam is relatively high at 58.34%, which is currently contributing positively to the financial performance of companies This can be explained as the direct participation of major shareholders in monitoring and controlling the business activities help minimize the agency costs, thereby enhancing the effectiveness of firm operation

CHAPTER CONCLUSIONS AND POLICY IMPLICATIONS

5.1 Conclusions

This dissertation examines the impact of corporate governance mechanism on organizational performance using a sample data of 100 companies listed on Hochiminh Stock Exchange (HSX) and Hanoi Stock Exchange (HNX) from 2014 to 2019 under the multiple linear regression model In which, the performance of companies is measured by four financial indicators which are ROA, ROE, Tobin’s Q and Z-score by Altman (1968), while the independent variables comprise board size, number of non-executive members on board, chairman ownership, CEO duality, executive board size, CEO ownership, ownership concentration and foreign ownership Besides, the model also includes two control variables which are firm size and firm leverage

The empirical results show that board characteristics, executive board characteristics, and ownership structure, in some way, all affect the performance of companies through several aspects Moreover, there are differences between findings of models using accounting-based measures (ROA and ROE) and those including market factor in their firm performance (Tobin’s Q and Z-score) Specifically:

• Board size has a negative impact on Tobin’s Q and Z-score, however, there is no evidence to support its relationship with ROA and ROE

• Number of non-executive members on board has positive impacts on ROA, Tobin’s Q and Z-score, however, there is no evidence to support its relationship with ROE

• Chairman ownership has a negative impact on ROA and ROE, however, there is no evidence to support its relationship with Tobin’s Q and Z-score • CEO duality has a positive impact on ROE, however, it negatively affects

• Executive board size has positive impacts on Tobin’s Q and Z-score, however, there is no evidence to support its relationship with ROA and ROE • CEO ownership has a negative impact on Tobin’s Q, however, there is no

evidence to support its relationship with ROA, ROE and Z-score

• Concentration ownership has a positive impact on all measurements ROA, ROE, Tobin’s Q and Z-score

• Foreign ownership has a positive impact on Tobin’s Q and Z-score, however, there is no evidence to support its relationship with ROA and ROE

In addition, firm leverage was found to have negative impact on all four measurements of firm performance Empirical results also show that firm size contribute negatively to ROA, Tobin’s Q and Z-score, however, there is no evidence to support its relationship with ROE

Theese research findings, once again, have confirmed the diversity of relationship between corporate governance and firm performance The differences in empirical results indicated by different regression models reflect the appropriateness of each performance measurement in observing and studying the interaction among these factors Therefore, the selection of an appropriate measure of firm performance to assess the relationships between factors is very important Besides, the research results have several similarities but also differences with other studies in the world, which indicates the specific characteristics of listed companies in Vietnam

5.2 Policy Implication

Based on empirical results above, the dissertation proposes a number of recommendations for policymakers and listed companies in order to improve the quality of corporate governance in Vietnam, whereby the performance of companies can be enhanced, as follows:

• For Policymakers:

one third (1/3) thereof must be non-executive members Since the board size has a negative impact on firm performance as indicated by research results, the policymakers should consider to reduce these levels of board size On the contrary, they could increase the required proportion of non-executive members on board in order to enhance the independence of the BOD as the number of non-executive members contributes positively to the performance of companies o The dissertation has shown a positive relationship between foreign

ownership and firm performance in Vietnam This result implies that the participation of foreign investors will enhance the performance of domestic enterprises Besides, in order to achieve the goal of upgrading Vietnam’s stock market and attracting foreign capital inflows, the policymakers should loosen the stock room for foreign investors (increasing the foreign ownership limit) This is also consistent with the proposal of Morgan Stanley Capital International (MSCI, a leading investment research firm worldwide) in 2019 which states that Vietnam should make further progress on relaxing foreign ownership limit to be upgraded to the emerging-market listing Moreover, the government also need to promote the progress of administrative procedure reform in order to simplify the procedures and overcome the stagnation in state management agencies

Chairman in particular and not comply with the regulations on corporate governance in general

• For Listed Companies:

o The Board of Directors should not have too many members to avoid the free riding problem and strengthen the coordination between members on board Moreover, in reality, the Ministry of Finance has stipulated clearly in the Laws on Enterprises that the BOD of a joint-stock company must consist of no more than 11 members However, there are still a number of Vietnamese listed firms not complying with this regulation, which is indicated by a wide range from to 13 directors of the board size variable in the observed dataset Therefore, these companies need to reduce their boards’ size in order to comply with the laws On the contrary, listed companies in general should increase the presence of non-executive members on board in order to enhance the independence of BOD

o The company could increase the size of executive board if that is necessary Especially during difficult periods or financial distresses, larger top management teams will enable the firm with more capabilities and resources to resolve the problems and improve the firm performance In order to so, the managers must be carefully selected to make sure that only qualified executives are employed o Many previous researches have argued that the chairman ownership

mechanisms such as remuneration and bonuses based on business performance

o Regarding the ownership concentration, the research results show that the presence of major shareholders are contributing positively to the performance of listed companies in Vietnam The presence of large shareholders helps mitigate agency problems and enhance the operational effectiveness of companies They also play a key role in providing companies long-term commitments on important aspects such as financial resources or managerial experiences However, the listed company still should have policies to protect the interests of minority shareholders For example, the firm may allow minority investors to nominate a candidate to the board election to ensure minority shareholders have voice in managing the company

o Research results also suggest that foreign ownership contribute positively to the firm performance since it brings many benefits to the firm such as abundant sources of capital, advanced technology, opportunities to enter foreign markets, etc Therefore, listed companies should push to attract foreign investment by actively seeking foreign partners as well as enhancing its quality of corporate governance

o In addition, listed companies should carefully consider the cost and benefits of using financial leverage and expanding firm size Empirical results indicate that firm leverage and firm size are negatively affecting the performance of companies Therefore, reducing the uses of debts and liquidating less profitable assets will improve the efficiency of companies

5.3 Limitations

In addition to achieved results, the dissertation still has several limitations as follows:

• Firstly, the sample under this research is quite small, which includes only 97 listed firms with 443 observations in a relatively short period of years Therefore, the results may not accurately reflect the actual situation of these enterprises during investigate period

• Secondly, many listed companies not fully disclose information in a transparent and timely manner, which leads to the missing of data This problem also affects the research results

• Last but not least, firm performance is a complicated concept which should be assessed through multiple dimensions Due to limited resources and unavailability of information, only financial performance is considered under this dissertation Therefore, it may not comprehensively evaluate the performance of companies

5.4 Future Research

For future research, the study can be developed by increasing the sample size as well as collecting data over a longer time period to enhance the quality of research results Moreover, there are also many other measures of firm performance The further researches can use these additional measurements to explore different aspects of the relationship

In addition, the research can become more practical and specific by examining the relationship between corporate governance and firm performance in a particular sector The research results and implications would be more concrete and appropriate to firms operated in that sector

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APPENDIX